Boots Group Strategy - Case Study Example

Introduction to Strategy Part I: Boots Group Environmental Audit The business environment Boots Group operates in can be characterized as very dynamic, with increasingly demanding customers and intensifying competitive pressure. 'In recent years they [Boots Group] have diversified their business from a traditional pharmacy to one offering one-hour photo-processing, opticians, and even home appliances in certain stores. In the 21st century Boots has faced increased competition from the main UK supermarkets, and it has struggled to grow.'(Wikipedia 2005) The top competitors are major retailers, e.g. ASDA, Superdrug and Tesco. However, in recent years with the further expansion of the Wal-Mart's operations in the U.K. and growth of specialized stores the competitive landscape became much more diversified. 'Boots operates in an extremely competitive environment where the pace of decision-making and speed of implementation is integral to success," said Boots' chief executive Richard Baker.' (WWD, Jan 23, 2004, p.13). In response to the changes of the environmental factors Boots Group has undertaken a number of measures. Among them are launch of the customer loyalty programmes, sale of non-core business branches, plans for merger etc. One of the examples is the loyalty programme that has been commenced early in the year. 'Customers earn four points for every 1 [pounds sterling] spent. They can buy goods with points, each point advantage card earned being worth a penny. Customers can also collect points on the Boots website, boots.com, but can't spend them on the site.' (Grocer, Feb 19, 2005 p45) The possibility to unite the efforts and capabilities with one more strong market player is for Boots Group another way of addressing the struggle for profits in a competitive environment. In October 2005 the company announced that 'it has been in talks for about six months regarding a merger with rival Alliance UniChem. The transaction was approved by both companies' respective executive boards and shareholders and is expected to be finalized in April, 2006.' (Hoovers 2005) The America's Intelligence Wire, Oct 3, 2005 noted that 'the merger comes after Boots. . .refused to reiterate profit guidance for the year amid slowing U.K. consumer spending and competition with Britain's top retailer, Tesco PLC'. Taken into account that the shareholders and potential investors are two more integral parts of the company's business environment, the rumours about possible merger that have been circulating for six months had significant influence on the stock performance. The ambiguity of the future outcome has partially caused the decline in the stock price earlier in the year followed by the increase after the announcement of merger has been made. (Reuters Quote 2005). The goal of the merger is to create 'an international, pharmacy-led company with a combined turnover of L13.0 billion ($23.11 billion), to operate under the name Alliance Boots. However, their proposal might yet be scuppered as several private-equity firms are reported to be looking at making a bid for Boots following the news that it is up for sale. Among these are KKR, Permira and Apax'. (Pharma Marketletter, Oct 10, 2005 p0) Another environmental aspect that becomes more and more important with the course of Boots expansion into the US market is the economic, social and political factors and the specifics of this market. The groups plan to gain strength in the US retail market in the upcoming few years: The firm is boosting its beauty product presence in U.S. retail partners CVS and Target, and by this fall, Boots beauty items will be offered in 130 stores, up from 32, which will give it entry into the key markets of Washington, D.C., San Francisco, Dallas, Minneapolis and suburban New York and Boston. This effort will also help the retailer gather data on how to successfully expand here nationwide in 2006 within these retailers. (Moore 2005, p.1) Organizational Audit The internal environment of the Boots Company is built upon a strong notion of heritage and value for customers and community. 'Building a better Boots' and 'Getting in Shape' have been recent additions to the philosophy established long before: We have been working to 'put the chemists back in Boots' - recognition that healthcare has always been at the heart of our business and will continue to be. It has not all been straightforward. The changes have been made as the trading environment has worsened and our sales line did not perform as well as we hoped in the last quarter of the year. But nothing that has happened has knocked our faith in our strategy. We are in the process of 'Building a better Boots'; one that is true to its heritage, a company trusted by successive generations because it is 'The Health and Beauty Expert'. (Annual Report and Accounts 2004-2005, p.3) With the change in mind Boots Group, nevertheless, keeps its social responsibility and corporate governance values. 'A strong sense of social responsibility is part of the Boots heritage. Today this is reflected in Boots values and behaviours and made explicit in the statement of business purpose'. (Project Sigma 2003 p. 2) A good example of the Boots Group values put into action can be a recent development of an award winning community investment programme that focuses on health promotion. (CBI 2004 p.1) During last two years with the launch of the cost-cutting incentive the company has undergone few major changes in the structure. 'The company has unveiled plans to sell its Boots Health International over-the-counter business with such brands as Nurofen, Strepsils and Clearasil. The company is hoping to sell the division within the current financial year.' (Drug Store News - NewsFirst, April 13, 2005 p2) The Boots management gives an overview of the current policy: We announced the 'Getting in Shape' cost program in 2002 with the intention of achieving 100 million [pounds sterling] [U.S. $183.7 million] cost savings from back office and supply chain activities," said Boots chief executive officer Richard Baker. Job cuts, said Baker, are the next step in that program. The reduction is estimated to save $71.6 million, of which $9 million will be reinvested in new store roles. The retailer admitted that while it has performed steadily in the past, it failed to punch its brand and franchise weight." (Kirsche 2004, p.7) As a part of cost-optimization programme 'Boots Group is transferring its supply chain operations and management of its D82 Warehouse to logistics company Unipart'. (Chemist & Druggist, Feb 7, 2004 p10) Long-Term Objectives and Strategic Options The strategy of Boots Group incorporates both the long-ago-developed company values and recent changes. 'The intensity of rivalry in an industry is a significant determinant of industry attractiveness and profitability'. (Pitts & Lei 2000, p.42) The increasing competitiveness of the retail industry is the very factor that has forced Boots to rethink its business strategy. The bottom line results as indicated in the Table 1 show unsteady trend for the last five years and decline in net profit in 2005. 'A realized strategy can emerge in response to an evolving situation, or it can be brought about deliberately, through a process of formulation followed by implementation.' (Mintzberg & Quinn 1988, pp.115-116). In Boots case the changes in the strategy was in major part influenced by the evolving environment. The current strategy of the company can be described as follows: 'The strategic goal is to make Boots a more modern, competitive and efficient retail business, in order to deliver value to shareholders. The company will continue 'building a better Boots' by focusing on the core healthcare market, with all the potential for growth it contains. They will continue to develop products that customers know they can only get from Boots, and continue to ensure that they offer value. They will do more to ensure that stores are where their customers want them and are easy to shop. Finally, they will continue to focus on the expertise of Boots people and the customer care they offer.' (Northcote 2005) Table 1. Boots Group Financial Performance Year ended Turnover (m) Profit before tax (m) Net profit (m) Basic eps (p) 31 March 2005 5,469.1 427.6 302.4 40.9 31 March 2004 5,325.0 579.9 411.5 52.8 31 March 2003 5,325.2 494.9 301.6 36.0 31 March 2002 5,328.3 595.8 404.3 45.9 31 March 2001 5,220.9 492.2 333.2 37.9 31 March 2000 5,187.0 561.7 399.0 45.0 Source: Wikipedia, the online encyclopedia: Boots Group (2005). [Online]. Available from: [1 November 2005] Organizations should expect their real unit costs to decline year on year. 'In high-growth industries this will happen quickly, but even in mature industries this decline in costs should occur.' (Johnson& Scholes 2002, p.168) Especially it is true for the companies operating in the very competitive industry like Boots does. The goal of reducing overall costs could have been addressed by implementing one or a few of the following options: Concentrating on the core competencies and most profitable business units and selling the less strategic or less profitable parts of the business; Diversifying the business practices to reduce the operational risks; Implementing innovative practices and launching more value-added products; Restructuring, streamlining business processes and reducing operational costs; Acquiring additional knowledge and resources by partnership etc. Overall, it can be said that Boots strategy effectively addresses the challenges faced by the company. The company, however, has to concentrate more on the innovative products and practices to serve nowadays more educated and conscious customers better. Though change from diversification during the previous years to concentrating on most profitable, core businesses may seem somewhat inconsistent, it was a necessary change because the diversification strategy in the complex environment reduces the flexibility a company possesses. And the lack of the flexibility can, perhaps, be named the major drawback of the Boots current organizational structure and strategy in spite of its undoubted strengths. The company has to develop more flexible approach as 'a strategy must represent an adaptive response to the external environment and to the critical changes occurring within it'. (David 1987, p.304) List of References: 'Boots advantage card. (What's the reward What customers get for their loyalty)', Grocer, Feb 19, 2005 v228 i7692 p45(1). Available from: PROMT [3 November 2005]. 'Boots and Alliance Unichem to merge', Pharma Marketletter, Oct 10, 2005 p0. Available from: PROMT [3 November 2005]. 'Boots Group could be bought; company sells OTC division', Drug Store News - NewsFirst, April 13, 2005 p2(1). Available from: PROMT [3 November 2005]. 'Boots layoffs amid gains',WWD, Jan 23, 2004 p13. Available from: PROMT [3 November 2005]. 'Boots switches to Unipart', Chemist & Druggist, Feb 7, 2004 p10. Available from: PROMT [3 November 2005]. 'Boots, Alliance Unichem ink merger deal', The America's Intelligence Wire, Oct 3, 2005. Available from: PROMT [3 November 2005]. Boots Group PLC. 2005, Annual report and accounts 2004-2005. [Online]. Available from: [2 November 2004] CBI The Voice of Business. Boots Group plc: Turning Obligation into Opportunity. (2004) [Online]. Available from: [1 November 2005] David, F.R. 1987, Concepts of Strategic Management, Prentice Hall, London. Hoovers: The Company Profiles. (2005). [Online]. Available from: [2 November 2004] Johnson, G., Scholes, K. 2002, Exploring Corporate Strategy, 6th edn, FT Prentice Hall, Harlow. Kirsche, M.L. 2004. 'Boots cuts 900 support jobs, adds to Rx roles', Drug Store News, Feb 16, 2004 v26 i2 p7(2). Available from: PROMT [3 November 2005]. Mintzberg, H., Quinn, J.B. 1988, Readings in the Strategy Process. Prentice-Hall, London. Moore, A. 2005, 'U.K.'s Boots set to grow footprint in U.S. beauty market", WWD, July 22, 2005, p1. Available from: PROMT [3 November 2005]. Northcote. Boots Group Corporate Strategy. (2005). [Online]. Available from: http://www.northcote.co.uk/default.aspSDL=NI00409 [3 November 2004] Pitts, R.A., Lei D. 2000, Strategic Management: Building and Sustaining Competitive Advantage, South-Western College Publishing, Cincinnati. Project Sigma. Boots Case Study: Assessing the product range for sustainable development risks and opportunities (2003). [Online]. Available from: [1 November 2005] Reuters. Quote for Boots Group. (2005) [Online]. Available from: [2 November 2004] Wikipedia, the online encyclopedia: Boots Group (2005). [Online]. 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